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Skies have cleared for hedge funds globally: Ernst & Young

Date: Friday, December 10, 2010
Author: Investment Executive

Impending regulations still weigh heavily on fund managers' minds

Hedge funds no longer stand at the abyss, says a new global hedge fund survey from Ernst & Young released Thursday.

“In 2008, at the height of the downturn, nearly half of the hedge funds interviewed reported investment returns of 10% or worse. In 2009, 45% reported positive returns of more than 20%. Less spectacular gains are expected for 2010, but the doom and gloom seems to be in the past,” says Leon Chin, Canadian hedge fund leader and partner at Ernst & Young.

The survey also reveals that investors agree with most hedge fund managers that the impact of new government regulations will reshape the future of the hedge fund industry. However, investors and managers both feel that enhanced regulations will not be overly beneficial.

Here are some notable findings from the survey:

-  Of the hedge fund managers who placed restrictions on investor redemptions at the height of the downturn, 45% have lifted them. Larger managers were the first to lift them, with more than two-thirds saying they have done so.

- Nearly 45% of hedge funds have made changes to fees, liquidity or structure in order to attract new capital. They've been more likely to have made these changes to win new mandates rather than to retain legacy capital.

- More than 40% of investors say they've pressured their hedge fund managers to lower management and/or incentive fees.

- Twenty-five per cent of investors say that increased transparency is the most important factor in their decision to hire a hedge fund manager.

- Hedge funds cite investor fear and reluctance as key obstacles in attracting capital.

“In discussing our findings with a panel of Canadian institutional investors at our annual Ernst & Young Hedge Fund Symposium held in Toronto in November, several of our key findings regarding focus areas were confirmed, including transparency, fee structures and increasing mandates,” Chin adds.

Despite the dramatic recovery in performance, hedge fund managers are very concerned with what the future holds, namely, impending regulation and the consequences of increased regulation.

Investors, meanwhile, expect greater transparency and agree that the impact of regulations will shape the future of the industry. Some expect to see a further reduction in hedge fund fees and more favourable liquidity terms. But few expect the consolidation that managers predict.

Ernst & Young polled 104 hedge fund managers globally (including several of Canada's largest hedge fund managers) who manage some US$585 billion in assets. For the first time, we also surveyed 53 institutional investors representing US$260 billion in assets, more than one-quarter of whom are invested in hedge funds.